Petition for Review of Order of the Federal Trade Commission.
Before SPARKS, MAJOR, and KERNER, Circuit Judges.
This is a petition to review a cease and desist order of the Federal Trade Commission, (hereinafter called the "Commission") issued September 19, 1939, in a proceeding had under Section 5 of the Federal Trade Commission Act, 15 U.S.C.A. § 45. The controversy before the Commission, as here, was, in a broad sense, whether colloidal graphite in petitioner's product, known as "Koatsal," when added to lubricating oil in internal combustion engines, has the effect of substantially diminishing friction and reducing wear of the engine parts which move upon or against one another.
The issues involved arise from the complaint filed by the Commission, and petitioner's answer thereto. By the latter's answer, certain charges of the complaint were admitted and petitioner consented that a cease and desist order be entered in conformity thereto. It will only be necessary, therefore, to refer to the charges of the complaint which were denied by the petitioner's answer. This portion of the complaint is as follows:
"In the course and conduct of its said business, as hereinabove described, respondent, in soliciting the sale of, and in selling its product, 'Koatsal,' by pamphlets, labels attached to containers of the product, letters, post cards, testimonials, advertisements inserted in newspapers, periodicals, and magazines, and otherwise, has made extravagant, deceptive, misleading, and false statements and representations regarding the value, efficacy, and effect of its said product, and the results that are achieved by using it, among which are the following:
"(b) That 'Koatsal' performs amazing feats of lubrication never before possible and utterly impossible by any other method, that it perfects lubrication and is more efficient than any other method because it is scientifically correct;
"(d) That 'Koatsal' penetrates and adheres to all metal surfaces it reaches, 'actually becomes a part of the metal, permeating the pores * * * literally "soaking" into it,' that the metal becomes plated with it and that moving parts ride on this plating;
"(e) That 'Koatsal' reduces friction as much as 50%, provides perfect protection against burned out bearings and makes metal self-lubricating;
The portion of the cease and desist order now in controversy precludes petitioner, in connection with the offering for sale, sale and distribution of its product "Koatsal," whether sold under that name or under any other name, from representing:
"(2) That Koatsal penetrates and adheres to all metal surfaces it reaches, permeates the pores of the metal, soaks into the metal, and that the metal becomes plated with Koatsal and moving parts ride on this plating;
"(3) that an automobile conditioned with Koatsal will run any greater distance without oil in the crankcase without damage to any part than will an automobile conditioned with ordinary lubricating oil of the same quality used in Koastsal;
"(4) That the lubricating qualities of Koatsal are any greater than the lubricating qualities of the oil which it contains;
As is common in cases of this character, the primary question for decision is whether the findings of fact as made by the Commission, upon which the case and desist order is predicated, are sustained by substantial evidence. Other incidental issues, perhaps not necessary for decision of the main issue, are (1) whether the report made to the Commission by its Trial Examiner, who heard the witnesses, may properly be considered, and (2) whether this court should make certain findings of fact which were proposed to the Commission by the petitioner and which it is claimed were not included in the findings as made. We shall first discuss these incidental issues.
The Trial Examiner made an original report February 1, 1937. Thereafter, additional evidence was taken and the Examiner filed a supplemental report September 16, 1937, neither of which was incorporated in the transcript, certified and filed by the Commission. Upon a supplemental petition filed by petitioner, this court directed the Commission to certify the reports made by the Trial Examiner without prejudice, however, to the right of the Commission to renew its objection to our action in this respect. The reports are here, and it is again contended by the Commission that, under the statute and rules of the Commission, they are no part of the record. The statute, section 5(c) provides that the Commission "shall certify and file in the court a transcript of the entire record in the proceeding, including all the evidence taken and the report and order of the Commission." It further provides that the court "shall have power to make and enter upon the pleadings, evidence, and proceedings set forth in such transcript a decree * * * ." Rule 13 of the Commissioner's rules, adopted May 21, 1938, provides: "The Trial Examiner's report upon the evidence is not a decision, finding, or ruling of the Commission. It is not a part of the formal record in the proceeding, and is not to be included in a transcript of the record." It is pointed out by the Commission that there is no provision in the statute for a report "upon the evidence" by the Trial Examiner, that such report is provided for only by the Commission rule which expressly states that such report is not a part of the record to be included in the transcript, and that, therefore, it is not required. Three cases are cited which it is claimed sustain this position. Algoma Lumber Co. et al. v. Federal Trade Commission, 9 Cir., 56 F.2d 774, Arrow-Hart & Hegeman Electric Co. v. Federal Trade Commission, 2 Cir., 63 F.2d 108, and Federal Trade Commission v. Hires Turner Glass Co., 3 Cir., 81 F.2d 362. In the Algoma case, the holding was to the effect that it was not incumbent upon the Commission to certify the Examiner's report unless such report was referred to in the findings of the Commission. That was not done there, nor is it done here, but the court further held that as to whether the Examiner's report should be subsequently certified, was a matter resting in the Court's discretion. In the Arrow-Hart case, it was held that the Commission was not required to certify the Examiner's report unless such report was referred to in the Commission's finding. In the Hires case, the court denied a request that the Commission be required to certify the report of the Trial Examiner.
The Examiner is an agent of the Commission, appointed, and with authority to conduct the hearing and make a report. It is the practice, as we understand - at any rate it was done in the instant case - when his report is filed with the Commission that a copy be served upon the interested party. Exceptions are, and in this case were, filed to such report. An argument was had before, and brief submitted to the Commission in support of the exceptions thus made. The statute requires a "transcript of the entire record in the proceeding" and we think that the report thus became a part of the record in the proceeding, which, by the statute, was required to be certified. If we are right in this construction of the statute, the provision of the Commission rule - "It is not a part of the formal record in the proceeding, and is not to be included in a transcript of the record" is in conflict with the statute and of no effect. Assuming, however, that the statute is not susceptible of such construction, we further are of the opinion that it is a discretionary matter with the court, properly exercised in the instant case. Such conclusion is not inconsistent with our statutory duty to accept the findings of the Commission as to the facts if supported by substantial evidence. In the instant case, the findings of the Commission, upon which its cease and desist order rest, are at variance with the facts as reported by its Examiner. The Commission undoubtedly had the right to make findings contrary to the facts as reported by its Examiner, but that does not preclude us from considering such report in connection with our determination as to whether such findings are substantially supported. In Staley Manufacturing Company v. National Labor Relations Board, 117 F.2d 868, decided by this court November 14, 1940, in considering a similar situation, we said:
" * * * In the same connection, while the report of the Examiner is not binding on the Board, yet where it reaches a conclusion opposite to that of the Examiner, we think the report of the latter has a bearing on the question of substantial support and materially detracts therefrom."
Before considering petitioner's request that this court approve certain findings of fact which it proposed to the Commission, it seems appropriate to make some further statement concerning petitioner's product "Koatsal" as well as the use for which it was intended. Colloidal graphite is a product of the high-temperature furnace, consisting of pure graphite, which is an allotropic form of carbon subdivided into particles so small and fine that they can be suspended in oil, water, or other liquid medium and remain for a long time in suspension therein in a manner close to and having many properties of a true solution. Petitioner's product, which is an oil containing such graphite, is sold for comingling as an auxiliary or adjunct lubrication to the mineral oil which is universally used to lubricate engines. It is the colloidal graphite in the product, which, according to petitioner, produces the beneficial effect. It is generally recognized that in operating an automobile engine, it is dangerous to permit the supply of oil to diminish beyond a certain point; that, if the supply of oil reaches a certain lower limit, the scoring and wearing of cylinders, piston rings and bearings are likely to occur; that the engine without sufficient oil will heat, causing it to "seize" and be subjected to various other injurious effects. It is also generally recognized that there are two conditions of lubrication in an internal combustion engine which are known as "full-film" and "boundary" conditions. While this distinction apparently has a material bearing upon the findings of the Commission upon which its cease and desist order was issued, it is not necessary to review or quote the testimony of numerous witnesses in this regard for the reason that both the Examiner, in his report, and the Commission, in its findings, recognize such distinction. The following statement is from the Commission's findings:
"The primary function of any lubricant in aeroplane and automobile motors is to reduce friction. Friction is waste work and is reduced by the forming of a film of lubricant between the stationary and moving parts of a bearing holding them apart. There is practically no contact of metal to metal when a full film of lubricant is maintained between the moving and stationary surfaces. However, within this lubricating film particles next to the moving surface are in motion and those next to the stationary surface are stationary so that there must be a constant shearing of the film, which action transforms work into heat. Twice in each revolution, each piston pauses momentarily as it reverses direction. During that pause the tension in the rings tends to force out any lubricant between rings and the cylinder walls. In any automobile or aeroplane motor, even when running under full film conditions, there is a momentary shearing of the film.
"When an automobile is given a fresh charge of lubrication, the film is as full as it is possible to maintain between the metal surfaces. This is called full film lubrication. As the lubricant is consumed and only a thin film exists, boundary conditions are approached. Boundary condition is that stage of lubrication when the film is negligible."
The Commission also recognized that "boundary" conditions of lubrication occur under a variety of circumstances. Regarding such conditions, the ...